I am sitting in front of my computer and scheming, or, more precisely, scamming. I am inventing scams as a way of raising awareness of how probability theory can be used for deception.

My first scam is my lottery project. Suppose I create and run a private lottery. I will award minor payments to some participants, while promising a grand prize of one hundred million dollars. However, there will be a very small probability that anyone will win the big payout. My plan is to live lavishly on my proceeds, hoping no one ever wins the big ticket.

The beauty of this scheme is that nobody will complain until someone scores the top prize. After all, everyone has been receiving what I promised, and no one realizes my fraud. If nobody wins the big award until I retire, I will have built my life style on deception without having been caught.

Suppose someone wins the hundred million dollars. Oops. I am in big trouble. On the other hand, maybe I can avoid jail time. I could tell the winner that the money is gone and if s/he complains to the police, I will declare bankruptcy and we will all lose. Alternatively, I can suggest a settlement in exchange for silence. For example, we could share future proceeds. Probability theory will help me run this lottery with only a small chance of being exposed.

But even a small chance of failure will cause me too much stress, so I have come up with an idea for another scam. I will write some complicated mathematical formulas with which to persuade everyone that global warming will necessarily produce earthquakes in Boston in the near future. Then I’ll open an insurance company and insure everyone against earthquakes. As I really do not expect earthquakes in my lifetime, I can spend the money. I’ll just need to keep everyone scared about earthquakes. This time I can be sure that I won’t be caught as no one will have a reason to complain. The only danger is that someone will check my formulas and prove that I used mathematics to lie.

Perhaps I need a scam that covers up the lie better. Instead of inventing an impossible catastrophe, I need to insure against a real but rare event. Think Katrina. I collect the money and put aside money for payouts and pocket the rest. But I actually tweak my formulas and put aside less than I should, boosting my bank account. I will be wealthy for many years, until this event happens. I might die rich but if this catastrophe happens while I’m still alive, I’ll declare bankruptcy.

Though I was lying to everyone, I might be able to avoid jail time. I might be able to prove that it was an honest mistake. Mathematical models include some subjective parameters; besides, everyone believes that nature is unpredictable. Who would ever know that I rigged my formulas in my favor? I can claim that the theory ended up being more optimistic than reality is. Who could punish me for optimism?

Maybe I can be accused of lying if someone proves that I knew that the optimistic model doesn’t quite match the reality. But it is very difficult for the courts to punish a person for a math mistake.

When I started writing this essay, I wanted to write about the financial crisis of 2008. I ended up inventing scams. In a way, I did write about the financial crisis. My scams are simplified versions of what banks and hedge funds did to us. Will we ever see someone punished?

Gerald:

Your plan reminds me a story Justin Wilson used to tell, about a Louisiana farmer whose mule died. He needed money to dispose of the mule, so he sold raffle tickets, 100 tickets at $1 each. The prize in the raffle, of course, was the mule. And of course, the advertisements didn’t mention that the mule was already dead. When the farmer explained this scheme to a friend, his friend said, “But Pierre, didn’t anyone complain?” “Only the man that won the mule, but I gave him his dollar back.”

Carlo:

Arif:

Carlo, she did not mention the distinction, because that is her point. There is no distinction. The financial crisis was a scam, and the operators were aware that is was a scam. It was only a matter of how long the scam could ride before the eventual happened. As long as it was postponed, huge gains were made. When it did happen, everyone claimed bankruptcy and asked for government bailouts.

Allowing people to take risks which are then covered by government bailouts/bankruptcy is a scam. That is exactly the point being made here.